This Portfolio Is Outperforming My Wildest Expectations

It's doing so well that I seriously doubt the good times will last.

Almost a year ago, the real-money Inflation-Protected Income Growth portfolio was launched with the objective of building an income stream that looked capable of growing at least in line with inflation. Thus far it has delivered far more than that. After yet another substantial gain since last week's update, the portfolio's total return since inception sits at a mind-boggling 29.6%.

That return is well ahead of my wildest expectations when I started the portfolio, though in total, it falls between the gains in the S&P 500 and the total return of an index investment, including dividends. Unfortunately, the rise in the market and in the stocks in the iPIG portfolio means that some picks are approaching the point where they should be sold based on valuation.

So close -- and yet so far For instance, J.M. Smucker (NYSE:SJM) nearly touched $110 last week, putting it close to the $120 sell target established for the jams and jelly maker based on valuation. Unfortunately, in the past week, Smucker reported disappointing earnings and forward-looking guidance, knocking its shares down a bit. Even before that bad earnings news, Smucker was trading in that nebulous "hold" range where buying more didn't make sense but selling wouldn't generate enough cash.

Conversely, United Parcel Service (NYSE:UPS) reached its previous $100 sell target after reporting decent earnings for the most recently completed quarter. The combination of the importance of this quarter's holiday season for shippers like United Parcel Service and the decent numbers the company put up earned it something like a stay of execution. Still, if UPS' stock hits $120 before this current quarter is reported, the company would be a candidate for sale.

In addition to those close calls, one company in the iPIG portfolio will be sold in the near future: Nevada electric generator NV Energy (NYSE:NVE). NV Energy is on track to get bought out for $23.75 per share in the first quarter of 2014 -- an acquisition that is forcing a sale by the iPIG portfolio. Indeed, with the stock recently trading above that acquisition price, there are only two reasons why the iPIG portfolio hasn't sold its shares: NV Energy's dividend and the fact that waiting until January makes the gain a long-term one.

Those dividends still keep on coming Fortunately, in addition to those surprisingly strong gains, the stocks in the iPIG portfolio have continued to pay -- and often increase -- their dividends. Those payments (and their growth) remain central to the iPIG portfolio's philosophy and plans, and this past week provided a great reminder of how that principle works in practice.

Last Monday, Texas Instruments (NASDAQ:TXN) paid its owners, including the iPIG portfolio, $0.30 per share in dividends. That dividend was $0.02 per share higher than the dividend Texas Instruments paid the previous quarter and $0.09 per share above the one it paid in the same quarter last year. That's a dividend increase of more than 42% year over year.

While dividend increases at that rate are likely not sustainable for a company of Texas Instruments' size, cash payments like that -- and whatever growth they're able to muster -- still matter a great deal. If the market starts to slow down -- or even reverse -- then those dividends will take on even more importance. After all, dividends are paid based on a company's ability to generate cash, not based on whatever the market's whim of the day decides is an appropriate price for its stock.

Still, there's no point in arguing against the gains that the iPIG portfolio has seen since its launch, as it's those gains that have truly allowed the portfolio to outperform my wildest expectations. Put together the gains with the income, and you get a portfolio that looked like this as of Friday, Nov. 22, 2013:

Author

Chuck Saletta has been a regular Fool contributor since 2004. His investing style has been inspired by Benjamin Graham's Value Investing strategy. Chuck also can be found on the "Inside Value" discussion boards as a Home Fool.